The Long-run Scenario as Illustrated by the Dow

By Mitchell Clark, B.Comm. Published : August 3, 2009

— by Mitchell Clark, B. Comm.

The Dow Jones Industrial Average has put in a commendable performance since the March low. Pull up a one-year chart on the index and you’ll find that its performance seems to be mirroring itself to the upside. The bad news is that the index needs to appreciate another 50% just to get back to where it was before the stock market began to deteriorate in the fourth quarter of 2007.

If you look at a long-term chart on the Dow, you’ll also notice that there are some very defined periods where stock prices rose tremendously or didn’t do much at all. In the early 1980s, you can see that the stock market took off with tremendous fervor, appreciating significantly until the market crash in 1987. Following the market’s recovery after that bubble burst, Dow stocks proceeded to appreciate over 300% over the next decade until 2000.

Previous to these good times, the Dow didn’t do much at all. From the 1960s to the early 1980s, the Dow moved just incrementally. And while the Dow stocks at the time would have paid dividends, this would have only kept investors just slightly ahead of inflation.

The stock market has proven to us that its major periods of wealth creation do occur in waves. The important question to ask, therefore, is: what wave or trend are we in now?

When the stock market peaked in 2000, it took about seven years to recover to that level. Then the market had one last hurrah over the next year or so; and then it began to deteriorate significantly before the subprime mortgage crisis.

I’m speculating of course, but my gut feeling is that the stock market will experience another major upswing as part of the current Fed-induced price “reflation,” and then experience another wave of lackluster, range-bound trading like we experienced from the mid-1960s to the early 80s. It’s guesswork, but that’s my current view on the long-run outlook for U.S. equities.

So, with this view, risk-capital investors would benefit by participating in stocks over the next few years, and then alter their portfolios to deal with inflation. It also makes me think that you won’t go wrong owning real property, commodities and some China.

Like I said, it is guesswork, but I don’t think that this scenario is that unreasonable. Pull up a 50-year chart on the Dow and it actually looks quite plausible.